Pass-through Businesses Aren't Always Small

February 13, 2015

Pass-through businesses are not traditional "C corporations." Instead, their income "passes through" to their owners, who pay individual income taxes on that income (rather than paying the corporate income tax rate).

Many people might think that a pass-through business is the same as a small business, says Tax Foundation Economist Kyle Pomerleau, but that's not so. While many pass-through businesses are small businesses (33.6 percent of them are self-employers or firms with 100 employees or less), 18.1 million Americans were employed at pass-through firms with more than 100 employees in 2011, while 10.3 million Americans were employed at pass-through firms with more than 500 employees.

For comparison, Pomerleau highlights the employment in traditional C corporations: 38 million employees in traditional corporations were employed at firms with at least 500 employees, while 4.7 million worked at corporations with 100 to 500 employees and 9.9 million worked at corporations that had less than 100 employees.

What's the significance of this? Because most people don't realize that many large businesses pay individual income taxes, calls for increasing the top individual income tax rate will ultimately hurt a number of large employers and, by extension, their employees.